Friday, May 17, 2013

Papers published on BALCO

Ironically, the judgment of the Constitution Bench in BALCO may turn out to be as significant for domestic arbitration as it is for finally shattering the misconception that the omission of the word “only” in section 2(2) of the Arbitration and Conciliation Act 1996 was designed to expand the jurisdiction of the Indian courts in relation to foreign arbitration. Some of these questions have been explored in three articles recently published in the Supreme Court Cases journal, of which the following is a brief summary.

Shantanu and I wrote a paper titled “Three Errors in BALCO” ((2012) 9 SCC J-26) in which we argued that while the Court was entirely right in overruling Bhatia International on the applicability of Part I of the Act to foreign arbitrations, it nevertheless made-as the title of the article suggests-three significant errors on other points. To briefly summarise:

       (1)   The conclusion in paragraph 96 that section 2(1)(e) of the Act refers to two courts, the court of the seat and the court of the cause of action is, with respect, clearly incorrect. Section 2(1)(e) confers jurisdiction on the court which would have had jurisdiction to entertain a suit forming the subject matter of the arbitration. As the Delhi High Court rightly pointed out in GE Countrywide, this means that a court in which an application under the 1996 Act is instituted must imagine that the arbitration clause does not exist and ascertain whether it would have had jurisdiction to entertain a suit relating to that dispute. So, if two parties from Mumbai and Delhi respectively choose Calcutta as the seat of arbitration, the Calcutta High Court would not have jurisdiction to entertain an application under the 1996 Act unless it was shown that some part of the cause of action arose in Calcutta. Unfortunately, the Supreme Court assumed in paragraph 96 of its judgment that section 2(1)(e) is a reference to two courts (the court of the seat and the court of the cause of action) and has therefore overruled by implication, a consistent view that has prevailed for over seventy years.

   (2) The Court, with respect, misunderstood the decision of the House of Lords in the Siskina and consequently proceeded on the erroneous premise that an action instituted solely to obtain interim relief in aid of foreign arbitration is alien to the common law. Had the Court appreciated that the common law does recognise such an action, it would then have had the opportunity to consider whether such an action is recognised by Indian law. We suggested that such an inquiry would likely have led the Court to conclude that such an action may be brought under section 151 CPC, addressing one of the major concerns raised by practitioners about the consequences of BALCO.

   (3)   There was no case whatsoever for overruling Bhatia International prospectively, considering that the dispute related to a point of statutory construction, and in particular a jurisdictional statute. As the House of Lords emphasised in Re Spectrum, the power should be exercised only in wholly exceptional cases, and with particular caution if the point the court is asked to overrule prospectively is one of statutory construction rather than the common law (Lord Scott of Foscote in his dissenting speech thought the power should never be exercised in relation to statutory construction).

A response to this article titled "Not Three but Half an Error in  BALCO" ((2013) 1 SCC J-81) was published by Mr SK Dholakia, Senior Advocate and Ms Aarthi Rajan, Advocate  in which they sought to support the judgment of the Court. In summary, their contention on section 2(1)(e) was that the “overarching seat theory” was the basis of which BALCO was decided, and led to the conclusion that the territorial court for domestic arbitration is solely the court of the seat, regardless of where the cause of action arises. According to them, in the Mumbai/Calcutta example above, the Calcutta High Court would have exclusive jurisdiction by virtue of being the supervisory court, that is, the court exercising territorial jurisdiction over the chosen seat of arbitration. They make the powerful argument that if two foreign parties choose Chennai as the seat of arbitration, and the cause of action arises entirely outside India, neither the Madras High Court nor any other Indian court would have jurisdiction under section 2(1)(e) even though Part I of the Act applies (by virtue of section 2(2)), which they contend is an anomaly that impedes the growth of arbitration where India is a neutral forum. In relation to our argument on the maintainability of an action for interim relief in aid of foreign arbitrations, they relied on the well-known judgments of the English courts in Castanho and Siskina, and the recent judgment of the High Court in Royal Westminster, to suggest that there can be no “suit” purely for interim relief. They also suggest that section 151 CPC cannot be invoked for this purpose because Order 39 Rule 1 is exhaustive. In relation to prospective overruling, they agree that using arbitration agreements (as opposed to pending petitions or applications, for instance) entered into after 06.09.2012 as the yardstick was erroneous, but support the use of prospective overruling in principle, relying on Patel Engineering.

We have now published a response to this article titled “Three Errors Revisited” ((2013) 4 SCC J-1), explaining our original argument and responding to some of the points raised by Mr Dholakia and Ms Rajan. We point out that the jurisdiction of the Indian courts to supervise arbitration is statutory, not inherent, supporting the view taken by the Delhi High Court in GE Countrywide, and therefore that it is not permissible for an Court to assume jurisdiction not provided by section 2(1)(e) on the basis of the "overarching seat theory". This cause-of-action based system of organising jurisdiction has, for better or worse, been part of Indian law for over seventy years. Whether that should be discarded in favour of a consent-based system of jurisdiction is, we suggest, a decision for Parliament, not the Supreme Court. On the maintainability of an action for interim relief in aid of foreign arbitrations, we demonstrate that the transition from the 1882 CPC to the 1908 CPC contains indications that what is now Order 39 Rule 1 is not exhaustive (indeed, the Calcutta High Court so held in the early 1900s), and that section 151 CPC is a possible basis on which such interim relief may be granted. We also revisit the discussion of the common law and establish that it contains no bar to such an action. Finally, we reiterate that it was not appropriate to overrule Bhatia International prospectively, because the appellants had not established that this was, to quote Lord Nicholls in Re Spectrum, “the wholly exceptional case” in which parties had relied on Bhatia International in organising their affairs. More generally, we suggest that prospective overruling should not be used on a case-by-case analysis of the “justice” of the competing claims but should proceed on the basis of clearly established legal principle, which should distinguish between overruling a point of common law and overruling a point of statutory construction.

1 comment:

Renu Gupta said...

I watched a matter in SC yesterday, where a party tried to take advantage of the "first error" in BALCO that you highlight in your analysis.

Although the appeal was dismissed and the court did not seem willing to entertain any argument, it clearly is an instance to demonstrate the error and the future litigation which will ensue based on para 96 of the judgment.